‘Strategic’ default?

Construction crews are no longer working on Summit Avenue and Norfolk Street in Scott’s Addition.

Progress on the two apartment conversion projects, which were supposed to be chic industrial-style apartments in an up-and-coming neighborhood, has come to a standstill as developer Justin French and his partner the Markel Corporation feud over funds needed to finish the project.

Now French is exercising a risky tactic: to purposefully let the bank foreclose on all of the projects he and Markel partnered on.

The chain of events might end in foreclosure not only for the Scott’s Addition properties, but also for several others around town – leading to millions of dollars in losses for a handful of community banks.

So what would prompt such a move?

“Markel is refusing to fund money for cost overruns and historic tax credits. I have exhausted all means to get them to do that,” French said.

Each of the two conversion projects carries about $9 million worth of debt held by Gateway Bank and guaranteed by French. Markel owns 30 percent of each project and is also the federal historic tax credit purchaser, French said.

Bruce Kay, managing director of investor relations at Markel, declined to comment for this story.

Developers often pre-sell the historic tax credits that an apartment conversion project will fetch. The state and federal governments give tax credits back to the developer for rehabilitating a historic structure, and the developers can sell those credits, usually for 60 percent to 80 percent of their value. Developers can use this tool to finance more than a third of a project’s cost.

The apartments conversion, which began construction in 2009, took longer and cost more than expected because the National Park Service rejected designs that the Department of Historic Resources had approved after work had begun, French said. One group approves the state tax credits; the other, the federal tax credits.

“We had to redesign the project, with related delays and cost overruns,” said French. “We had to tear down parts and rebuild.”

French said that he told Markel in January about the cost overruns and that they said to go ahead and continue work and they would provide their part of the funds or work out some other solution.

In April, with most of the original construction funds depleted, French said he requested Markel’s share of the overruns (about $700,000), which they refused to supply.

Markel was unwilling to provide any more funds for the project unless French got Gateway to agree to write off $1.5 million of the principal of the Norfolk Street project and lower interest payments, among other demands, according to French.

French said Markel owes him almost $3 million for historic tax credits that he delivered to the company from other projects they worked on, a total of about 10 properties across Richmond. French said that he could use a portion of those funds to finish the project but that Markel has refused to advance any of the tax credit funds until the Norfolk Street project was finished.

French said that as the tax credit investor, Markel was given the power to write contracts and dictate terms, and the stipulation that they could tie all of the tax credit purchases together and withhold funds until the completion of all projects was in the contract. But French said Markel had given him the impression that they would not exercise that option.

“They verbally told me we would work something out and to go full speed ahead on construction and spending funds,” French said.

French’s strategic defaults would invalidate the $2.9 million worth of tax credits awarded to Markel from the projects, as well wipe out any equity they had in any of the projects. French said the potential losses for Markel could be about $10 million.

As for the banks, they stand to lose millions as well, but French said his goal is to reassume all of the loans.

“I value the relationship with the banks and respect the people working for them. The goal is to use foreclosure as a tool to remove Markel as a partner and then appropriately restructure the remaining debt,” said French. “If the banks want me to assign other assets as collateral, I am willing to do so if that’s what it takes.”

French said he has the cash flow available to make the payments on the loans but is choosing not to spend it on the projects. He also owns buildings on Cary Street downtown and in the Manchester section on the South Side of Richmond.

French said the banks might not respond well to his maneuver.

“Some of these banks have conservative boards, and they might be mad at me and decide not to write me another loan and end up doubling their losses,” French said.

Dean Crouch, a banker with Gateway Bank, said his bank does not comment on transactions, so it isn’t clear what course of action they plan to take. French and another source confirmed that Gateway is having a contractor access the property to determine the amount of money needed to complete construction.

Drew Holtzman of Paragon Bank, which holds the debt on two industrial properties French and Markel own together on Roseneath Road, also declined to comment. French said that Holtzman told him at a meeting this week that they would begin the foreclosure process on the Roseneath properties as well as French’s property in the 2000 block of Broad Street, which include unfinished apartments.

French said he was relying on withheld tax credit funds from Markel to complete construction on his own apartment project in the 2000 block of Broad, and the loan on that property is collateralized with the loans on the Roseneath properties.

Below is a list of the other properties French owns and for which Markel is either tax credit purchaser or minority partner. French said he is defaulting on the below loans in order to force Markel out.

3122 W. Clay St.
Lender: Union First Market Bank

1509 Belleville St.
Lender: Union First Market Bank

Commercial Block East Main Street
Lender: Union First Market Bank

1726 Altamont Ave.
Lender: Virginia Commonwealth Bank

614-620 N. 28th St.
Lender: Virginia Community Bank

3012-3026 Q St.
Lender: Virginia Commonwealth Bank

1314 E. Cary St.
Lender: Virginia Business Bank

1312 E. Cary St.
Lender: Peoples Bank

2201-2203 W. Cary St.
Lender: Gateway Bank

2223-2225 Parkwood Avenue
Lender: Gateway Bank

Al Harris is a BizSense reporter. Please send news tips to [email protected]

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30yearold
30yearold
10 years ago

Character repays loans first and foremost. Clearly Mr. French has none. He should be ashamed at this “tactic”, despite his use of it as “leverage”.

richmondbanker
richmondbanker
10 years ago

I agree with 30yearold. If Mr. French think that banks in Richmond will re-lend to him after this “strategic default”, he is mistaken.

Mark Kittrell
Mark Kittrell
10 years ago

Just as we all pay the costs of shoplifting and employee theft when we buy products in the retail marketplace, we likewise pay for individuals purposely defaulting on their loans in the form of higher rates, fees and onerous loan conditions when we borrow money, large and small. It appears Mr. French is willing to sully his reputation/sacrifice his bankers because his partner won’t do what he wants them to do…. And his partner is acting within the limits of the partnership agreement….. And this conflict came about due to a “verbal” misunderstanding. I’d never trust such an individual enough… Read more »

james
james
10 years ago

Markel isn’t holding up its end of the bargain. Don’t go criticizing Justin’s character! He’s trying to do the right thing here — hold Markel to their word and provide historic designations on these buildings so they can be protected. Markel is the scumwipe here.

Justin is taking a massive risk that I wouldn’t take in this economy. But I think he thinks it’s better than going to bankruptcy if he can get the banks to cooperate. Banks, unfortunately, aren’t too cooperative these days while they wait for Obama to kill them.

Bystanderwhoknows
Bystanderwhoknows
10 years ago

These types of deals are not about loans they are about contracts on credits. People posting so far seem to have a very limited understanding of these types of deals. If your tax credit partner is being an unruly ass and will not pay for the credits you have few options to deal with them. Foreclosing on his properties may be the only tool he has to remove Markel as a partner and tax credit investor. It may be the ONLY leverage he has to make them pay for the credits they have already used on their tax returns. It… Read more »

admin
admin
10 years ago

I’d encourage posters to use their real name.

Bob Richmon
Bob Richmon
10 years ago

This should be a simple situation to rectify, two parties entered into a contract, now they just need to do what each committed to in this document. There is a saying everyone should live by “The Verbal Word is only as good as the paper it’s written on”. Sounds like you have two big players here without enough paper trail. Sit down and work it out like BIG BOYS!

Contractor
Contractor
10 years ago

I was called this morning from a friend to read the above article on Justin French. We both have something in common and that is Justin owes both of us money. We are both contractors and stand to loose a substantial amout of money in these deals. We have performed work, but have not been paid. I’m sure that Markel, Justin and the banks will bounce back, but as far as the contractors involved in these deals it could very easly put them out of business. It’s a shame that the people that will suffer the most are the contractors… Read more »

Justin French
Justin French
10 years ago

I went to Al about the article because I wanted all of the shareholder victims of Markel’s Vice Chairman to know the truth about what is occurring. The victims are shareholders of the banks and shareholders of Markel. The above story does not stress enough the risk that Markel created for them. Some of the unnamed individuals that commented do not realize that without my assistance the banks will suffer a much greater loss. I am willing to work and sacrifice whatever is required to protect the eventual repayment of the banks and the contractors. Telling everyone the truth about… Read more »

suggestion
suggestion
10 years ago

I’d suggest that Justin change the slogans on the buildings from “Vision in Progress” to “Vision in Regress” as he works these issues out……..

kevin douglas
kevin douglas
10 years ago

To assume that anyone would not excersise a clause in a contract is not wise. Markel put that clause for a reason to protect their interests. To “move full speed on spending” on a verbal that is opposite of contract language seems a little incompetent.

Screwed Contractor
Screwed Contractor
10 years ago

As a cotractor that Mr. French owes us $300k I hope they bury him under the jail, he is not willing to pay his debts and will walk away with clean. Who is that fair too? My 30 plus workers could lose their jobs because this jerk wants wants to walk away from his debts and leave me holding the bag on the labor cost and materials. You tell me how that is upstanding. When you call his office they tell you to go ahead and lien the building. Then he brags about he many leins they have. Really makes… Read more »

richmondbanker
richmondbanker
10 years ago

Maybe they finally figured out they were funding his bi-weekly trips to Las Vegas, brand new Range Rover, chauffeur and private plane? Just a guess. I’d stop stroking checks to.

interested party
interested party
10 years ago

It’s hard to believe any defense of buildings that have been kept vacant under the claim of renovation for four years. Take a drive past 2223-2225 Parkwood. French kicked the tenants out after buying the buildings in 2005 and has been sitting on them ever since, occasionally doing a bit of work here and there. Historic renovation credits? More like corrupt real estate speculation.

2223, 2225 tenant
2223, 2225 tenant
10 years ago

To the comment above, the apartments at 2223 and 2225 have been done for sometime now. They are beautiful and we have very much so enjoyed living here…he has stayed true to his historic renovation concept and it has worked fabulously in this fully leased building.

Elizabeth Tune
Elizabeth Tune
10 years ago

I find it necessary to clarify a point of information as reported in yesterday’s story “’Strategic’ Default? In it Mr. French states that the National Park Service “rejected designs” for an “apartment conversion” in Scott’s Addition. In its review of the proposed scope of rehabilitation, the National Park Service stated that the proposed density of 89 units was too great and would adversely impact the historic character of this modest industrial building; NPS required that the plans be revised accordingly. While the Department of Historic Resources (DHR) did approve of the original plan, DHR staff identified the density issue and… Read more »

Justin French
Justin French
10 years ago

I just read the comments by Ms. Tune and they are correct. All of the partners wanted to move forward based on the initial response from DHR. The more cautionary approach would have been to wait for NPS, as she stated above. Throughout this process, Ms. Tune and her staff were very helpful. I also just read the comments by “screwed contractor” and I would say that individual screwed himself by his own actions. It really pains me that someone that I built a company for and carried his entire staff through five years, a recession, and made millions of… Read more »

Jeff H
Jeff H
10 years ago

So, it appears that Mr. French sold Markel historic tax credits before they were approved by NPS. DHR did approve, but warned that NPS may not. Sounds like there’s a whole lot more to this story than was first reported….

Kudo’s to Markel for not mudslinging. Shame on Al Harris for shoddy, one-sided journalism.

interested party
interested party
10 years ago

Well, tenant, I stand corrected. I hope they’re nice since it took almost four years of renovation. Good luck keeping your lease when the property is foreclosed-upon and/or Mr. French decides to sell it.

Justin French
Justin French
10 years ago

In response to the “interested hater” that keeps harassing my Parkwood tenant. I have a good idea who you are. The local slumlord I bought them from that I also beat in court to you public embarrassment. You are obviously an uneducated real estate investor. The tenant’s rights are binding even if ownership changes. Don’t worry, you don’t have to pay me again for this additional education. Why don’t you stop being such a coward and use your real name.

Jeff Hamm
Jeff Hamm
10 years ago

In the interest of small town politics, I would like to clarify that Jeff H is NOT Jeff Hamm. Even though the comments are not too derogetory this is none of my business and I have chosen not to comment. The only thing I will say that this is better than Jerry Springer.

Ed Conner
Ed Conner
10 years ago

Justin , My company has repeatedly tried to contact you regarding your overdue balance for the resturant project we completed in January for you. I have read you comments about having the avalible cash flow, so your prompt attention to this matter would be appreciated. I have kept the details confidential for now and Im not making any character judgements yet. please respond.

David Gammino
David Gammino
10 years ago

Neither I nor anyone from City & Guilds posted the “screwed contractor” comment-though I wish whomever did, would simply have the ethics/courage to disclose their identity.

Moreover, this post is a very strong example of why RichmondBizsense ought to prohibit anonymous posts.

Justin French
Justin French
10 years ago

Jeff Hamm is a good guy. I can’t say the same about “Jeff H.” I would be happy to debate you face to face. I am not Jerry Springer…….. but I might hit you with a chair.

Jason G.
Jason G.
10 years ago

For those interested in more comments speculating about Justin French’s business ethics, take a look at this blog entry about the opening of The Republic and the closing of Enoteca Sogno: http://www.rvafoodie.com/?p=1032

andyh
andyh
10 years ago

Why do I have this feeling that I will get whole story about this in a few months on American Greed on CNBC?

Shane Burnette
Shane Burnette
10 years ago

I normally don’t post anything on “message board” type forums where people can hide behind a fictitious name and then say whatever they want, but i felt compelled to do so this time. The real truth of the story is that none of the posters, including myself, really know what’s going on. The only people that 100% know what is going on are the parties that are involved. I do have an opinion about several comments made by great guys like “richmondbanker”, “contractor”, “screwed contractor” and the like. As a subcontractor myself who has been “screwed” on occasion i totally… Read more »

Nicholai
Nicholai
10 years ago

This is all very childish, how noble everyone is when they get to throw stones while wearing hooded masks. I will say for the character of the man he’s a nice guy, i met him because he took me out to lunch a while back, not a huge gesture but it was one that showed he liked reaching out in the community as a leader after he read about a local artist starting out on a new thing in the city he took such a leadership role in; his jets, vehicles, trips and where he goes on them is between… Read more »

Kevin Anderson
Kevin Anderson
10 years ago

The comments on this article are actually more upsetting to me than the actions of Mr. French. As a new business owner in his 20s I regret the inevitable day that I have to deal with such immaturity myself. Gossiping and arguing should be left for the high schools and to the contractors seeking funds: hire an attorney.

Justin French
Justin French
10 years ago

David, Thanks clarifying that neither you nor your employees made those comments. Whomever that poster is, they are lying. I don’t owe that amount to any contractor. Ed, I will settle up with you. It is taking longer because of the lender on the building. The bank is Union First Market, but 50% of all of my loans with UFMB are owned by Markel. I am using any lien you place on the building as leverage against them. This is unfair to you, and I apologize for that. However, my goal of foreclosure is to harm Markel, not you. There… Read more »

Gordon E
Gordon E
10 years ago

So… To recap the article: Mr. French has personally guaranteed the repayment of approximately $18 Million to the lender (Gateway Bank) for the two subject projects. Mr. French purports to have the funds to carry the debt and keep the interest current, which would likely be his contractual obligation as a guarantor, but has elected not to use his funds for this purpose, instead electing to allow the loans to lapse into default. Meanwhile, the minority investor/partner apparently has no contractual obligation to either the lender or to partner, Mr. French, to fund any additional capital at this stage of… Read more »

OldContractor
OldContractor
10 years ago

I am reminded why I quit the contracting business after 25 years. I love building and hate contracting. It’s ugly. Not knowing all the facts, it seems that poor judgment advanced the project prematurely and contributed to cost overruns. Contracting is a risk reward enterprise and IMO, poor judgment should be punished, not rewarded. Mr French chose the role of decider. I believe the honorable decision today would include taking the loss and preventing a loss to others. Finish the job, pay the subs, sue your partner. From the facts presented here, you will probably lose the law suit. Too… Read more »

Jeff H
Jeff H
10 years ago

The purpose of these comment sections is to garner discussion and debate. Mr. French, you should have realized from the onset that articles published in the on-line media never have 100% support. You would have been better served to sit back and “watch” the comments develop, instead of jumping in. And yes, for the record, Jeff Hamm is not Jeff H. There’s no need to debate me “face to face” – nor offer to “hit me with a chair”. Forums such as this give the reader the opportunity to comment on their view of the article (good, bad, or indifferent).… Read more »

Dustin Smith
Dustin Smith
10 years ago

What Jason G. said was fascinating to read, but I just wanted to state the people running the Republic really are nice folks and I enjoyed working with them.

As for the rest of this mess, I think Kevin A. sums it up the best and I doubt it’s going to get sorted on the internet.

30 feet below Libbie Park
30 feet below Libbie Park
10 years ago

Part of me has to laugh at this and part of me has to cry. My company thats been doing business in this town for 70 years can’t get a loan. This is the reason. Everybody involved, the banks, Frenchy, Mar-cant, all these guys are greedy man. Instead of giving all the money to one company or another why cant they spread the money around. Thats how you build a community and develop relationships. Not by a bunch of fly by night maneuvering. I don’t know the specific facts of this “Raw Deal” but where were the bankers with the… Read more »

Steve Manolo
Steve Manolo
10 years ago

I used to watch Mr. French on Family Affair.

Bernie Stanley
Bernie Stanley
10 years ago

Jeff Hamm, You should give me a call so we can talk about doing solar for your customers. We met through Mike Connors a while back. Justin, I have already offered to help you with solar, and the door is still open. I will naturally want to be paid in cashier’s checks:) I don’t believe it is relevant whether Justin flies to Paris for dinner twice a week. Eliminating Markel seems like a good idea. Dissing the banks in the process seems like a bad idea when people are lucky to borrow at all these days. Give me a call… Read more »

Justin French
Justin French
10 years ago

I am really enjoying my ability to respond to people because it gives me an opportunity to include information that I provided, but was excluded from the article. I do not think this is intentional on Al’s part, just that it is a very complicated issue. Who’s first? Gordon E: “So….. to recap” …. Actually Gordon E the two projects with Gateway Bank are entirely different types of loans from the other ones involved. They are large construction loans that Markel defaulted on their participation in cost over-runs. When I approached the main point man for their company, he told… Read more »

Jeff H
Jeff H
10 years ago

Get a grip. Your first comment was a joke, second one wasn’t? You’re actually threatening bodily harm on an internet blog?

I was making rational comments/observations and you’ve gone off the deep end.

You don’t want to make an enemy of me.

I think a lot of people are giving you good advice here. Pick up the phone and contact all involved to see if a solution can be arranged. No one here can help you and you’re wasting time and ticking off your “partners” (banks and Markel).

Corinne
Corinne
10 years ago

Bernie –

As someone that has witnessed first hand Justin French’s style of business with the solar industry, please take this advice and stay far away. There are better partnerships out there.

interested party
interested party
10 years ago

You have my identity wrong, Justin, but thanks for trying. Suffice it to say, your efforts at “revitalization” caused real and legitimate harm to the area around Parkwood by creating longstanding vacancies. Things may have improved now, but a chorus of current and former residents would agree.

In any case, based on word on the street about your accounts-owed and experiences of people who have done business with you, it sounds like you have a lot of cleaning up to do. Stop trying to blame it on others.

joseph d
joseph d
10 years ago

As a resident of Scott’s Addition, I have had more than one opportunity to hear Justin French promise something and then fail to deliver. That in and of itself makes me question the integrity of his actions in Scott’s Addition.

This latest maneuver indicates to me that Justin French is a person that can not be trusted and is dangerous to the Richmond community. I truly hope that the banks have enough sense to tell Justin where to go when he applies for new loans.

Linda H
Linda H
10 years ago

I find Justin’s bloviating about his good will and assumption of risk for other’s profit hilarious. Anyone who takes a closer look at his company will see his reckless use of loan money swept away to personal accounts, patterns of abuse towards his female subordinates, and total disregard for ethical business practice.

If Justin has the liquidity to meet investor demands and complete ongoing projects why then is he under continuous scrutiny from banks and the IRS?

This house of cards known as French Consulting Company is going to tumble.

larolane
larolane
10 years ago

Yawn. Just another jello brain “wannabe” sailing through Richmond and leaving piles of crap on his way out. Same old story- 30 years in the making. Tired and crappy buildings litter this city and every wannabe in Virginia sets his eyes on them trying to make a buck and not knowing what they are doing. It’s all fabulous talking the dream, drinking wine and pontificating about how great the “Fan” district will be– just give it time. Yeah, right. Same old story. 1970’s, 1980’s, 1990’s and today. Scott’s Addition- LMFAO- some up and coming area indeed. Ask John Batte about… Read more »

john m
john m
8 years ago

It is stunning to read all of this 2 years later, with all that has gone down in the interim.